The 200 Best Small CompaniesBright, Very BrightKurt Badenhausen 10.30.06

Stretching 134 feet long and 55 feet high and weighing 52 tons, the scoreboard is the largest high-definition video display in the world, delivering crisp instant replays and ad messages plus game timing, player stats and, of course, animation to whip the home crowd into a frenzy. For the University of Texas at Austin, it's the crown on a $164 million face-lift to its football stadium. For Daktronics of Brookings, S.D., it meant $6 million of revenue and one of the most challenging assignments in its 38 years. The usual lag time between signed contract--in this case, May 8--and game time is 12 months. Daktronics had to be good to go in 4: Opening day for the national champion Longhorns was Sept. 2. "You have to see it to appreciate it," says Chief Executive James Morgan, 59. An understatement.

Daktronics
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) leaned on Nichia Corp., its Japanese supplier, for a rush order of 5 million light-emitting diodes. Project manager Jody Kress supervised the assembly of 36 giant pieces that were loaded onto flatbeds for the trip from South Dakota to Texas. Over eight days in August a construction crew in Austin snapped the parts together, Lego-style, and mounted them onto an aluminum frame; electricians worked an additional two weeks to hook power up to each section. It took two days to get the bugs out, but the scoreboard was ready on time. The Longhorns won their opener, 56--7.

Over the most recent 12 months Daktronics has netted $21 million on revenue of $329 million. It has a third of the worldwide market for LED video displays. But a much bigger market beckons, one that Daktronics has scarcely begun to exploit: LED billboards.

Founded with $200,000 in 1968 by two South Dakota State University engineering profs, Duane Sander and Aelred Kurtenbach, Daktronics had ambitions of developing biomedical instrumentation but settled on electronic voting systems. For R&D, design and sales, the company drew on SDSU students, a practice it continues today. Its third hire was Jim Morgan, who graduated from the university with an engineering degree in 1970. "We were rich in children, poor in dollars," recalls Kurtenbach, who remains chairman today. (Sander once served on the board of directors but kept his day job until he retired in 1999.)

Serendipity pushed the company into scoreboards. Kurtenbach was friends with the university's wrestling coach, who complained he was forced to make do with a basketball scoreboard. So Kurtenbach designed a three-sided electronic pyramid. Visiting teams noticed, and by 1971 colleges across the country were putting in orders for the "Matside" scoreboard. They used incandescent lamps to display stats, the same technology Daktronics relied on for the next 25 years, through an exclusive contract to provide the scoreboards for the 1980 Winter Olympics in Lake Placid, N.Y., large displays for Caesars Palace in Las Vegas and an electronic voting system for the U.N. General Assembly.

By the early 1990s Daktronics had a problem. When it came to scoreboards for sports stadiums, incandescent bulbs were no match for cathode-ray tubes (CRTs) used in the giant video displays--remember the Jumbotron and Diamond Vision?--pioneered by Sony
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). Daktronics still sold a respectable number of the systems, but it had to partner with the giants from Japan, thereby missing out on 50% to 75% of the total take.

All that changed a decade ago when LEDs began to displace CRTs. Light-emitting diodes--semiconductors that emit light when electricity passes through them--have been around since the early 1960s. They're more energy-efficient and longer lasting than the bulbs Edison invented, and they're a lot less fragile. They're also brighter than cathode-ray displays, thanks to improvements in design and manufacture, as well as the introduction of blue LEDs, made widely available in the mid-1990s. By adapting the technology to 1-by-1-foot modules--each containing 16 rows and columns of red, blue and green pixels--that could be loaded on to circuit boards, Daktronics could finally compete in the same ballpark as Sony and Mitsubishi, offering a video-ready scoreboard.

Immediately, sales picked up, with the first 3 installations at college stadiums in 1997, which rose to 16 in 1998 and 42 in 1999. Daktronics went on to make displays for dozens of stadiums, including those for the Dodgers, the San Francisco Giants, the Red Sox and the New England Patriots, as well as for the venues that hosted the Olympics and the World Cup. "It's fun to be involved in the Olympics, but they come only every two years, so it's not something you build your business around," says Morgan.

Opportunities in pro sports have cooled a bit. Of the 122 baseball, football, basketball and hockey teams, 81 are playing in new buildings that have opened in the last 15 years. Daktronics' sales to sports venues jumped 20% in 2005 but barely budged in 2004. There's still room to serve the nation's colleges and high schools. With the exception of scoreboards for large universities, such projects are rarely subject to open bidding and thus tend to be more profitable, offering a 40% gross margin, against a typical 30% for pro-team jobs. Daktronics taps into the secondary-education market largely through 40 offices around the country, and invites some prospects to go pheasant hunting each fall in South Dakota. Nothing is simple, however. Since it has become politically incorrect to devote school funding to stadium scoreboards, Daktronics often finds companies to sponsor the work, in exchange for advertising on the boards. A football scoreboard for the Mesquite school district in Texas, for example, drew such backers as Edward Jones, Gateway
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Easily the fastest-growing segment for Daktronics lies in the commercial market, which now makes up 35% of sales. For years the company has been making signs that help light up Las Vegas and Times Square. Its signs for Walgreens and CVS have long advertised 24-hour service or, say, $5 off Pampers.

Since 2001 Lamar Advertising
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), the third-largest billboard operator in the U.S., has been a big customer of Daktronics' digital signs. Like scoreboards, they also rely on modules, consisting of rows of LEDs illuminated at a lower voltage than most scoreboards and controlled over a secured Internet connection. Why not turn to Mitsubishi, which also makes digital billboards? "We felt strongly about dealing with an American fabricator," says William Ripp, director of Lamar Digital. "The first board really popped; you noticed it from a long way off." Mounted near Lamar's headquarters in Baton Rouge, La., the sign featured rotating ads for Coca-Cola
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), Budweiser and several smaller businesses. After that, billboards went up in Cincinnati, Pittsburgh and Kansas City, where the first ads solicited leads in the murder case of 19-year-old Ali Kemp. A call to the billboard's tip line led to the killer's arrest. Billboard market leader Clear Channel Outdoor
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) has been slower to enter the electronic market but has also enlisted Daktronics for several test programs, in Cleveland and Albuquerque.

Competition? Absolutely, and not just from Mitsubishi (Sony exited the LED-display business in the U.S. a couple of years ago). Among them: outfits like privately owned Young Electric Sign Co. (the oldest and largest producer of electric signs in Las Vegas) of Salt Lake City, Utah and Magink Display Technologies
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) of Mevasseret Zion, Israel, whose boards made a splash at this year's Cannes Film Festival. Its so-called digital ink relies on cholestoric molecules (the same stuff that clogs arteries) that can be spread over different lengths, thereby reflecting different colors from ambient light during the day and spotlights at night. Analysts say the technology works best with smaller billboards (10-by-20 feet); Magink disputes this. One drawback is a discernible mosaic effect, similar to a tile wall. Nevertheless, Clear Channel is running a test in London; Lamar is also considering Magink for future boards.

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